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Almost every large company understands it needs to build an organization that deals with the ever-increasing external forces of continuous disruption, the need for continuous innovation, globalization and regulation.

But there is no standard strategy and structure for creating corporate innovation.

We outline the strategy problem in this post and will propose some specific organizational suggestions in follow-on posts.

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I’m sitting at the ranch with Alexander Osterwalder, Henry Chesbrough and Andre Marquis listening to them recount their lessons-learned consulting for some of the world’s largest corporations. I offered what I just learned from spending a day at the ranch with the R&D group of a $100 billion corporation along with the insights my Startup Owners Manual co-author Bob Dorf who has several Fortune 100 clients.

Collectively we’re beginning to see a pattern and we want to offer some concrete suggestions about Corporate Management and Innovation strategy and the structural (i.e. organizational) changes corporations need to make.

If we’re right, it will give 21st companies a way to deal with innovation – both sustaining and disruptive – as a normal course of business rather than by exception or crisis. Companies will be organized around Continuous Innovation.

Strategy and Structure in the 21st CenturyWhile companies have existed for the last 400 years, their modern form is less than 150 years old. In the U.S. the growth of railroads, telegraph, meat packers, steel and industrial equipment forced companies to deal with the strategies of how to organize a complex organization. In turn, these new strategies drove the need for companies to be structured around functions (manufacturing, purchasing, sales, etc.)

90 years ago companies faced new strategic pressures as physical distances in the United States limited the reach of day-to-day hands-on management. In addition, firms found themselves now managing diverse product lines. In response, another structural shift in corporate organization occurred. In the 1920’s companies restructured from monolithic functional organizations (sales, marketing, manufacturing, purchasing, etc.) and reorganized into operating divisions (by product, territory, brand, etc.) each with its own profit and loss responsibility. This strategy-to-structure shift from functional organizations to operating divisions was led by DuPont and popularized by General Motors and quickly followed by Standard Oil and Sears.

General Motors Organization Chart ~1925

In each case, whether it was organizing by functions or organizing by operating divisions, the diagram we drew for management was an organization chart. Invented in 1854 by Daniel McCallum, superintendent of the New York and Erie railroad, the org chart became the organizing tool for how to think about strategy and structure. It allowed companies to visually show command and control hierarchies – who’s responsible, what they are responsible for and who they manage underneath them, and report to above them. (The irony is that while the org chart may have been new for companies, the hierarchies it described paralleled military organization and had been around since the Roman Legion.)

While org charts provided the “who” of a business, companies were missing a way to visualize the “how” of a business. In the 1990’s Strategy Maps provided the “How.” Evolved from Balanced Scorecards by Kaplan and Norton, Strategy Maps are a visual representation of an organization’s strategy. Strategy Maps are a tool to translate the strategy into specific actions and objectives to measure the progress of how the strategy gets implemented (but offer no help on how to create new strategies.).

Strategy Maps from Robert Kaplan

By the 21st century, organizations still lacked a tool to create and formulate new strategies. Enter the Business Model Canvas. The canvas describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The canvas ties together the “who and how” and provides the “why”. External to the canvas are the environmental influences (industry forces, market forces, key trends and macro-economic forces.) With the business model canvas in hand, we can now approach rethinking corporate innovation strategy and structure.

Management Innovation in the 21st CorporationExisting companies and their operating divisions implement known business models. Using the business model canvas, they can draw how their organization is creating, delivering, and capturing value. A business model for an existing company or division is not filled with hypotheses, it is filled with a series of facts. Operating divisions execute the known business model. Plans and processes are in place, and rules, job specifications, revenue, profit and margin goals have been set. Forecasts can be based on a series of known conditions.

Inside existing companies and divisions, the business model canvas is used as a tool to implement and continuously improve existing business models incrementally. This might include new products, markets or acquisitions.

A New Strategy for Entrepreneurship in the 21st Corporation

Yet, simply focusing on improving existing business models is not enough anymore. To assure their survival and produce satisfying growth, corporations need to invent new business models. This challenge requires entirely new organizational structures and skills.

This is not unlike the challenges corporations were facing in the 1920’s. Companies then found that their existing strategy and structures (organizations) were inadequate to respond to a changing world. We believe that the solution for companies today is to realize that what they are facing is a strategy and structure problem, common to all companies.

The video below (from Strategyzer.com) emphasizes that companies will need to have an organization that can do two things at the same time: executing and improving existing models and inventing – new and disruptive – business models.

We propose that corporations equipped for the challenges of the 21st century think of innovation as a sliding scale between execution and search.

For companies to survive in the 21st century they need to continually create a new set of businesses, by inventing new business models.

Most of these new businesses need to be created outside of the existing business units.

The exact form of the new business models is not known at the beginning. It only emerges after an intense business model design and search activity based on the customer development process.

Companies will have to maintain a portfolio of new business model initiatives, not unlike a venture capital firm, and they will have to accept that maybe only 1 out 10 initiatives might succeed.

To develop this new portfolio, companies need to provide a stable innovation funding mechanism for new business creation, one that is simply thought of as a cost of doing business

Many of the operating divisions can and should provide resources to the new businesses inside the company

We need a new organizational structure to manage the creation of new businesses and to coordinate the sharing of business model resources.

Some of these new businesses might become new resources to the existing operating units in the company or they could grow into becoming the new profit generating business units of the company’s future.

In future blog posts we’ll propose a specific structure for Entrepreneurship and Continuous Innovation in the 21st Corporation.

Lessons Learned

Continuous disruption will be the norm for corporations in the 21st century

Continuous innovation – in the form of new businesses- will be the path for long term corporate survival

Appropriate post. At the August LLP for Educators, it was interesting to note that a majority of those in attendance were not from academe, rather from existing companies. Most likely there is significant value in adoption of these techniques for existing companies…growing and changing from strengths in their existing organizations…perhaps easier (?) than launching new ventures. Looking forward to more posts on this topic…best regards…Stan

I think there is a convergence going on, by combining the talents you gathered at your ranch, gleaned from the books the continuous innovation movement can evolve. Be interesting to see how you go about structuring this, beyond Gary Hamels MIX approach, combining up with it. Maybe this may be a twin speed approach- not just get out in the market to learn and evolve but get ‘within’ your own walls to learn how through an internal BM canvas.

Dear Steve,
I enjoyed reading your above posting on the evolution of Strategy and Structure in business. However, I’m taken by your remark that “By the 21st century, organizations still lacked a tool to create new strategies.”

Or, what about the tools of Blue Ocean Strategy (such as the Strategy Canvas and Four Actions Framework) featured by W. Chan Kim and Renee Mauborgne especially in articles of the Harvard Business Review in the late 1990s?

Blue Ocean Strategy is great for differentiation, but has nothing to do with corporate entrepreneurship in general. Porter stuff is great for competitive strategy and cluster formation, but again nothing to do with corporate entrepreneurship in general. Each of the ideas you mention don’t really solve the strategy and structure problem.

Dear Steve,
I believe we don’t need yet another structure or consulting model for strategy for that matter. It’s all up to the mindset and attitude.

I work with the larger corporates in the Netherlands and abroad and they are achieving great results just by adapting the entrepreneurial mindset described by the Effectuation principles. If you read as many books as you mentioned, you must be aware of Effectuation Theory. If you ever visit the University of Utrecht again, which I think you probably will :-) I would love to meet and hand you a copy of my Corporate effectuation and/or Orchestration of Effectuation.

If corporates would only orchestrate the unused potential that is available within the corporates by remixing their means we will have a transformation blast for years.

Applying the effectuation principles, lowers their risks, makes them much more adaptive and proactive creators of new markets as well.

All of the materials and work methods you and the guys you met at your ranch have given us the tooling that will last for years. If only we would use them wisely… effectually I would say.

Steve,
Thanks for your clarification, for I had thought that your statement refers to tools for product/service strategy. Just for the records, I’d like to note that Blue Ocean Strategy and in particular, Value Innovation is great for resolving the trade-off between differentiation and low cost.

With regard to corporate entrepreneurship in general, the Blue Ocean Strategy book has some interesting ideas and a visual tool for developing and managing corporate growth strategy. The tool is the Pioneer-Migrator-Settler (PMS) Map and focuses on organizing a portfolio of businesses (business models) according to their stage of maturity on the S-curve, that is, as pioneers, migrators, and settlers; pioneers refer to new businesses or startups with Blue Ocean business models. My interpretation is that with regard to corporate entrepreneurship, corporations need to have a dynamic mix of Blue Ocean and Red Ocean businesses (business models). Future corporations have to be ambidextrous.

Admittedly, the framework that you are proposing for corporate entrepreneurship appears more comprehensive. For instance, Kim and Mauborgne do not talk about the prospects and limitations of managing an ambidextrous organization or ambidextrous models in a corporation. I’m therefore eagerly awaiting the rest of your story on corporate entrepreneurship.

As always, thanks for the great insights that you provide on the future of entrepreneurship and organizations.

Think you’re right about this issue: big companies fail at this for a number of reasons (culture, inertia, silos, ‘wounded prince’, sales/product dev’t/marketing disconnect). And traditional approaches like team meetings, focus groups, skunk works, ‘incentives’ (been there) are internally focussed and not on the ‘customer’ whose tastes/needs are ever rapidly changing.

You might like to know that there is an Australian innovation, in beta, which addresses this corporate issue and many of the entrepreneur issues on your business model canvas.

Using a simple analytics platform, the technology maps business model, product features and customer profiles from the outset prior to market launch. It allows corporates/entrepreneurs to use customer inputs (your “get out of the building” advice) to pivot in real time.

If you would like to learn more about the company, its innovation and product lines, and the Nobel prize-winning science that inspired it, their web site is at http://www.theseusdm.com.

Hi Steve,
There are indeed some large challenges to be overcome to realise the eight points listed (point seven may be most difficult). In my experience some of these are where:
– The capital structure and operating metrics of the new business models are different to that of the legacy model which the capital allocation and performance management processes (and culture) are built around
– The company wants to “monetise”/”white label”, operational assets and the asset owners sit within the legacy model and performance management system
– The company is large and the need of management to be seen to be ‘moving the needle’ requires a significant enought opportunity to be identified up front
– The company is public with large institutional shareholders
– The company traditionally sucks at benefits realization and holding people accountable

I believe that you’re addressing a problem that is alive and well with most established businesses today – large and small. In his recent book, “the business model innovation factory,” the author, Mr. Saul Kaplan, explains that disruption is now the norm vs. the exception and that incremental changes/innovations are corporate habits that continue to serve a master who doesn’t understand the new world and the economy that it pretends to serve.

It’s true, business models don’t last as long as they once did. They are constantly under attack by new thinkers and doers who are supported by disruptive technologies and who have abandoned the use of old era industrial rules and methods. And to make matters worse, these new-day entrepreneurs utilize connected markets to bedazzle consumers and quickly defeat their competition as they become the newest market leader.

Today it’s much more than a survival or relevancy issue, its all about changing one’s worldview through continuous and powerful innovation in existing markets along with the ability to create and pioneer new ones.

With that said, I look forward to your observations and the many solutions that you’ll be sure to offer for debate and discussion.

Hi, Steve — I’m not convinced that organizations, once they reach a certain size, are capable of responding to disruptive forces. I agree with Clayton Christensen — their profit maximizing strategy is a significant barrier to figuring out how to do the disruption dance.

In organizations so deep and wide that they require mind-numbing meetings with complicated (and complex) Powerpoint presentations to keep everyone up-to-date on project xyz … disruptive innovation simply has no place to breathe.

Steve,
Great post! We are working through these very same challenges inside a $100B health care company. We are certainly incorporating your customer development approaches, but so many more supporting changes throughout the enterprise are needed to create an environment that fosters and cultivates entrepreneurship inside a Fortune 25. We are making progress on the organizational, cultural, and financial structures needed and would love to trade stories.

First of all, great post. I especially agree with the fact that companies need to continuously maintain a portfolio of new businesses.

There are four challenges for companies in doing that (and maybe you plan to address them on the next post):

1. Not having the right people with the right DNA – Companies tend to hire domain experts with a similar characteristics as the rest of the employees
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2. Organizations find it hard to bear uncertainty and prefer to spend countless hours in meeting rooms, debating the risks and trying to mitigate them.

3. Companies have a brand to maintain and testing things that are “half baked” can lead to objections from different parties within the company.

4. These portfolio of new businesses usually fail the “CFO test” and are at risk of being cut back every time the company’s performance is under pressure.

My experience, has led me to believe, that these new businesses need to exist somewhat outside of the company, with an incentive system that is similar to a startup and independently of the corporate dynamics.

On the business level, we are trying to help corporations do just that with 2020: http://www.2020.vc

I’ve always found in European corporates that things go wrong when they set up an innovation department in the belief that their existing business models are “basically OK’ and that they just need a bit of tweaking like your video suggests.

The success comes when the corporation realises that innovation is a culture and the only way forward is to continually test everything.

[…] The Future of Corporate Innovation and Entrepreneurship (Steve Blank) – Almost every large company understands it needs to build an organization that deals with the ever-increasing external forces of continuous disruption, the need for continuous innovation, globalization and regulation. But there is no standard strategy and structure for creating corporate innovation. We outline the strategy problem in this post and will propose some specific organizational suggestions in follow-on posts. […]

In the past few issues Harvard Business Review has published a number of articles addressing this shift directly or tangentially. Including concepts such as a dual operating system, adaptive strategy approach, and dual strategic business transformations when faced with disruption; one transformation initiative of the core business model, and one transformation initiative for developing new disruptive enterprises for long term growth.

Steve…my experience is in the Defense Industry and like it’s customer, the government, it is slow to change. Nonetheless, I’m seeing some indication that even the big primes are shifting their thinking as the external force of reduced federal spending squeezes the entire industry.

At least one company I’m talking to is beginning to consider utilizing the business model canvas as an approach to designing newer, more innovative business models. This is desperately needed in Defense. The jury is still out, however, on whether these innovative approaches can be effective unless the customer (government) changes their approach at the same pace.

I’ll be anxious to read your thoughts on how the approach you outlined above interacts with the internal and external organizational structure and inertia.

Corporate accelerators and a corporate LEAN approach to external start-ups is a good starting point for corp innovation…but they have to apply in the best way ITIL change management to boost efficiency and adaptation…I think your 8-point table is the corporate Bible for any Chief Innovation Officer !

[…] In conversation with Sheena Iyengar, S.T. Lee Professor of Business at Columbia Business School, Steve Blank, arguably one of the nation’s leading thinkers on organizational innovation, will share some of his new approaches to Corporate Innovation. […]